a current account deficit (CAD) means you have money leaking out of your country and going to ROW (rest of world). i see here (https://www.imf.org/external/region/tlm/rr/pdf/fpp5.pdf) that it can be 'funded' via a number of ways. but why is borrowing locally not one of the ways? i am guessing maybe its something to do with that if you borrow locally, then yes money is created , but thats only Inside Money, whereas the money leaking out was Outside Money = HPM = Bank Reserves + Notes&Coins?
A current account deficit is when a country imports more goods, services, and capital than it exports. The current account measures trade plus transfers of capital.
When a country imports goods, it has to pay for them. That means it moves money from the importing goods. When it exports goods, money moves into the country. If imports are more than exports, then the net effect of the imports and exports is for money to go out of the country. There are three basic places this money can be coming from: external debt, printing money (which in a way is debt), or drawing down cash reserves.
Internal borrowing can't account for the deficit, because each dollar of internally borrowing is, by definition, matched with a dollar of internal lending.
The current account deficit is an effect, not a cause. The cause is cause of a current account deficit is more foreign borrowing than foreign lending -- that imbalance must be accounted for somewhere, and that place is the CAD.
I think you're referring to slide 19 in that presentation, which seems self-explanatory to me
Financing a CA deficit:
– Equity investment into the country, E
– Borrowing (accumulation of foreign debt, D)
– Drawing down foreign assets, FA (bank deposits abroad, or reserves of monetary authorities)
To the extent a CA deficit is not financed by equity investment or a drawdown of foreign assets, external debt is increasing.
So there are two ways to avoid accumulating foreign debt outlined in there.
Since that presentation was given in Myanmar (and is mostly about that country), the context is one of developing countries, so printing your their currency to pay for their CA deficit (which is US dollar denominated in that presentation) isn't an option in that context. Of course, if you are the US, that idea might pop in someone's head...
For (someone in) Myanmar to borrow US dollars from an internal Myanmar source in order to pay for [excess] imports, how does that internal source get a hold of US dollars in the first place? It's ultimately [i.e. ignoring more Myanmar intermediaries] through one of the there sources outlined in that slide.
ok i think i have figured out the answer to my question! the answer is indeed that borrowing locally, ie the private sector borrowing from itself, cannot possibly help in funding the CAD because the private sectors borrowings from itself always net out to ZERO , ie private sector's indebtedness to itself is ZERO always! this is because if A borrows from B 100, then A's debt to B is 100, and B's credit to A is 100, ie B's debt to A is -100 , so total of the debt of A and B is 100+-100 = ZERO. The key here is to think in terms of total net debt of the private sector to itself, rather than think of total gross debts (which in my example are 100 as for total gross debt, you do not net off the credit). So while the CAD may cause a redistribution of private debt to itself between various sectors of itself, eg between firms and household , poor and rich , or an increase in gross debts within itself, it has no affect on total private debt to itself.
And in particular , if the CAD is bigger than the budget deficit , then money is leaking out of private sector so private sector is dissaving , so private sectors holdings of foreign assets (assets in gov sector or foreign sector, eg holdings of money , treasuries , and foreign equities, foreign properties, foreign assets) must fall and private sectors debts owed to foreign countries rises, and also, foreigners holdings of your countries assets may increase.